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Spain: EU at Mercy of US-China Trade Negotiations

24th November 2019 Print

Spain's economic story has been one of nearly endless doom and gloom since the turn of the millennium – and it all began the day the shared euro currency launched in the country in 1999.

Bringing with it low interest rates, Spain's subsequent overindulgence in spending, equivalent to 10% more than its GDP, created bubbles in the labour and housing markets that would eventually burst. And, in 2008, the embattled country fell into a six-year recession that produced peak unemployment rates of 26.9% - nearly a third of the country's workers – by the first quarter of 2013.

Since then, Spain has slowly recovered, both in terms of its unemployment rate (14.7% as of Q1 2019), its forex markets, and the security of its Eurozone membership. However, its public debt remains high due to wages outstripping economic output, political instability, (both at home and in major market influencers like the USA and China) and a flagging tourism industry that may have peaked too soon.

Combined, the cowering shadow of recession has grown bolder, and growth was four-to-five tenths weaker in 2018 than in the year before.

EU Nations Need Leadership Security

Ironically, 2019 seemed like it could be a bumper year for the Spanish economy. The European Securities and Markets Authority - one of a pair of entities that oversees the securities market in Spain, established new rules that banned binary options and placed leverage restrictions on some trading instruments across the EU. And, while especially restrictive in Spain, confidence in local trading increased as the reins tightened and volatility fell.

Much like the UK though, Spain has had trouble maintaining a functioning government over the last few years.

While the former country has been mired in Brexit negotiations since 2016, a situation that could claim its third Prime Minister in December 2019, Spain has had four general elections in four years. And, with the most recent poll producing a hung parliament, the country faces ongoing division even if caretaker PM Pedro Sánchez makes a return to office.


Inevitably, Spain's inability to provide any kind of leadership security has had implications for the entire Eurozone.

Back in April, following the third of the country's quartet of elections, bets against the euro by speculators hit record levels, with Bridgewater Associates' Ray Dalio staking $18bn against Europe as an investment, and consumer expenditure flatlined. At the time, however, Germany and Italy were also facing political strife alongside Spain as well.

There's a mote of hope though. Brexit will no longer be a 2019 event (the no-deal departure date is now January 31 2020) and the EU has enough of a surplus balance to protect itself against further economic strife.

Analysts and forex signals services are suggesting that betting against the dollar with the euro may be viable for the first time in six months, as the two regions' respective identity crises ease and improving (though still shaky) US-China trade relations support EU exports. That latter point still needs examining, though.

Ending the US-China Trade War

Speaking to finance website Bloomberg, Nordea Investment strategist Sebastien Galy claims that Chinese growth will bolster the Eurozone as the country sells “incoming dollars to buy euros”. However, that scenario is unlikely to come about until Beijing and Washington end their trade war.

China's economic growth reached a 26-year low in October 2019, as the International Monetary Fund took a grim view of the impact of the tariff battle on growth worldwide, cutting projections for the year by .2% to 3%.

Foreign exchange

Worryingly, the conclusion of the US-China trade war has suffered from several setbacks. Politics, again, got in the way of a planned summit in South America to resolve the protracted issue, with Chilean citizens taking to the streets of the country's capital Santiago to protest living costs, income equality, transport fares, and their incumbent leader Sebastián Piñera.

Phase one of US-China trade war negotiations eventually began by phone on Saturday November 16 2019.

US President Donald Trump may have expected a more remorseful China than the one that turned up to negotiations though. Washington wants China to buy US$50bn worth of farm goods to offset the damage caused to America's heartlands by the trade war itself. However, given that Beijing has never spent even half that on US agriculture (the previous 2012 record is US$24bn), the United States may have placed its diplomats at an early disadvantage in talks.

So, the outcome of the trade war is tied to the performance of the euro going into 2020 and beyond. If China can't restart its stuttering economic machine, investor and trader interest in Europe is unlikely to increase beyond current levels, and the Spanish and UK economies, in particular, could continue to battle with negative political influences.

Renewed interest in the EU vs. USD currency pairing should come as a welcome development for forex traders, however.

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